Roads to Prosperity
Leaderless Global Governance
Dani Rodrik
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CAMBRIDGE – The world economy is entering a new phase, in which achieving global cooperation will become increasingly difficult. The United States and the European Union, now burdened by high debt and low growth – and therefore preoccupied with domestic concerns – are no longer able to set global rules and expect others to fall into line.
Compounding this trend, rising powers such as China and India place great value on national sovereignty and non-interference in domestic affairs. This makes them unwilling to submit to international rules (or to demand that others comply with such rules) – and thus unlikely to invest in multilateral institutions, as the US did in the aftermath of World War II.
As a result, global leadership and cooperation will remain in limited supply, requiring a carefully calibrated response in the world economy’s governance – specifically, a thinner set of rules that recognizes the diversity of national circumstances and demands for policy autonomy. But discussions in the G-20, World Trade Organization, and other multilateral fora proceed as if the right remedy were more of the same – more rules, more harmonization, and more discipline on national policies.
Going back to basics, the principle of “subsidiarity” provides the right way to think about global governance issues. It tells us which kinds of policies should be coordinated or harmonized globally, and which should be left largely to domestic decision-making processes. The principle demarcates areas where we need extensive global governance from those where only a thin layer of global rules suffices.
Economic policies come in roughly four variants. At one extreme are domestic policies that create no (or very few) spillovers across national borders. Education policies, for example, require no international agreement and can be safely left to domestic policymakers.
At the other extreme are policies that implicate the “global commons”: the outcome for each country is determined not by domestic policies, but by (the sum total of) other countries’ policies. Greenhouse-gas emissions are the archetypal case. In such policy domains, there is a strong case for establishing binding global rules, since each country, left to its own devices, has an interest in neglecting its share of the upkeep of the global commons. Failure to reach global agreement would condemn all to collective disaster.
Between the extremes are two other types of policies that create spillovers, but that need to be treated differently. First, there are “beggar-thy-neighbor” policies, whereby a country derives an economic benefit at the expense of other countries. For example, its leaders restrict the supply of a natural resource in order to drive up its price on world markets, or pursue mercantilist policies in the form of large trade surpluses, especially in the presence of unemployment and excess capacity.
Because beggar-thy-neighbor policies create benefits by imposing costs on others, they, too, need to be regulated at the international level. This is the strongest argument for subjecting China’s currency policies or large macroeconomic imbalances like Germany’s trade surplus to greater global discipline than currently exists.
Beggar-thy-neighbor policies must be distinguished from what could be called “beggar thyself” policies, whose economic costs are borne primarily at home, though they might affect others as well.
Consider agricultural subsidies, bans on genetically modified organisms, or lax financial regulation. While these policies might impose costs on other countries, they are deployed not to extract advantages from them, but because other domestic-policy motives – such as distributional, administrative, or public-health concerns – prevail over the objective of economic efficiency.
The case for global discipline is quite a bit weaker with beggar-thyself policies. After all, it should not be up to the “global community” to tell individual countries how they ought to weight competing goals. Imposing costs on other countries is not, by itself, a cause for global regulation. (Indeed, economists hardly complain when a country’s trade liberalization harms competitors.) Democracies, in particular, ought to be allowed to make their own “mistakes.”
Of course, there is no guarantee that domestic policies accurately reflect societal demands; even democracies are frequently taken hostage by special interests. So the case for global rulemaking takes a rather different form with beggar-thyself policies, and calls for procedural requirements designed to enhance the quality of domestic policymaking. Global standards pertaining to transparency, broad representation, accountability, and use of empirical evidence, for example, do not constrain the end result.
Different types of policies call for different responses at the global level. Too much global political capital nowadays is wasted on harmonizing beggar-thyself policies (particularly in the areas of trade and financial regulation), and not enough is spent on beggar-thy-neighbor policies (such as macroeconomic imbalances). Over-ambitious and misdirected efforts at global governance will not serve us well at a time when the supply of global leadership and cooperation is bound to remain limited.
Dani Rodrik, Professor of International Political Economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.
Copyright: Project Syndicate, 2012.
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justoffal 01:56 15 Jan 12
This was a good read! I would like to seize on the opportunity to echo your sentiments on Global emissions standards and for a moment to see the humor in the apparent calamity that is the stuff of Global Warming prophecy.
while china sits large in the politically correct eco-preservation circles I find it amusing and alarming at once that anyone would take seriously their commitment to international welfare. As they complete one coal fired plant per week on average they also control large holdings in the up and coming carbon credits markets.
Don't you find that interlining? I do! This is like throwing out the Umpire and relegating his duties to the guy on the mound. While China fills the skies with Co2 emissions making the carbon credits increasingly more valuable...they also get to sell permission to other nations to do the same.
Not a bad con eh?
gamesmith94134 08:48 15 Jan 12
Gamesmith94134: global finance’s Supply-chain Revolution
“Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up.” It was because there is no firewall available during the crisis, and the pipeline was open with few operators in the financial control like Mr. Sheng said, also, there is even fewer currencies like Euro-dollar only was available in most transactions, even though the public funds like sovereignty debts were being privatized in the open trade, and it create the explosion by volume in sum of money was credited. Firewalls I took off the technical terminology means there is no safety transitory zone established physically, that our financial system allowed the flow in the supply chain freely as the computerized transaction allowed, and there is less time available for reexamination on lack of control, source of origin, birth of credits.
Especially, when the parties took the international reserves for granted that Fed and ECB cut it interest rates to its minimal for the non-inflationary measure that many would consider money are free if they can beat the time. Generally, the 22 players turned the international financial market into their casino. When their governments were the ones who called to upbeat its economies from the recession after the expansion of the debts hitting it fiscal ceiling, and the slow down cut their productivity in near recession. At the same time, the rigid exchange rate went lopsided that created the tension between the debtor and creditor. It exploded.
At present, the financial system must evolve itself with firewalls that stop contagion of the collateral damage over the money with no backing, and shrink the pool of cash for credit lending. Some might call it deleverage of the past 20 years mishaps, or change of climate in our global financial that the supply-chain must stop and check itself; besides, most of us would know by now that money supply and productivity are not on the same parallel at certain point under the influence of inflation an deflation. Without the assurance of the balance payment or imbalance of its exchange rates, the supply-chain will reverse itself.
Perhaps, I like it better if the sovereignty debt and private investment should not be classified as same in enjoying the low interest rate, that sovereignty debt should be handled separately by the Central Banks and World Bank if it does affect the exchange rate when evaluated by IMF for it answer to lack of control.
Transfer Unions must be established to void unsafe transaction and the Trans-continental Zoning to confirm the source of the origin on all transactions when the transaction is registered to enter its zones, or cut hot cashes that undervaluing ones currency from another that influences the international currency exchange rate. Besides, I see the floating rate system is a joke if it put sovereignty in defensive; and it should go with its yardstick like performance that values at each quarters.
Finally, international banks are “too big to fall” should became a legend only, and they must be downsized that international is not licensed to evade sovereignty. There are more of reforms available in regional account and obey to safety net where it allows. Perhaps, if the banker can purchase these sovereignty bonds and metro bonds from the central bank like FED or ECB instead of chasing the wild goose in the open market; the general public can have some credits available for doing business.
If someone question on the equities dealing among the banks, why only the politicians who talk over the policy on financial and there is no financial police system to oversight the banking as a whole. I think the United Nations Security Council can build a better division on financial security than G7 or G20, and it is inclusive for the globalized finance and my past experience tells me so. Evolve or not, we may stand by and watch the outcome of our present crisis and it not over yet till everyone would feel safe from hegemony through these firewalls. If some suggest cooperation from community in forgiving ones’ debt, it would be worse than my New Year project in losing weight every year, and I have been laughing at myself all my life. Without firewall in safeguard one’s wealth, each would isolate itself from contagion for a long, long time.
May the Buddha bless you?
owais 04:05 17 Jan 12
I am not sure I entirely agree on your characterization of agriculture subsidies as "beggar thyself". You do mention costs imposed by such actions on other countries, but if seen within the overall message of your piece which is about rationalization/prioritization of global actions then putting agriculture subsidies as a "beggar thyself" is questionable. In fact agriculture subsidies, particularly by developed countries should be more on the global agenda because of the huge costs it imposes on poor countries.
I also think that besides domestic sovereignty and non interference, appetite for global leadership also needs confidence which some of the emerging economies are finally exhibiting with the economic success that they have achieved. Thus, although it may take a bit more time I expect these emerging and rapidly growing economies to take on greater role including leadership in setting the global governance agenda.
Owais
gamesmith94134 06:19 17 Jan 12
gamesmith94134 05:06 19 Oct 11
Gamesmith94134: Sarkozy Prods Regulators
Mr. Sarkozy called for minimum cash deposits for derivatives trades, a central global registry for all commodities trades, and drafting new rules against "market abuse" and World Trade Organization has the best of Inter-agency Task Force on Statistics of International Trade in Services and Inter-agency Task Force on International Merchandise Trade Statistics available.
However, the data does not give the best of control even through the offices of the World Trade Organization; it would depend on the zone like EU or OCED in charge on the anti-trust or Sherman act in similar that oversees on the mergers or purchases. The best controls of on the derivatives trades that even call of minimum cash deposit, because cash deposit is not sufficient for control since commodities and resource trading has a delay process and element in completion of the trade. If seller and buyer compromise on the deal, then, Zone by EU or OCED might underwrite legislatives in resolving the imbalance through its political power to extend control over its regional resources. Then, the sovereignty nation can purpose the regulator to monitor the transaction or settle on the disputes over the region. The best choice is through the global supervision like World Trade Organization since the Organization can provide a better vision on the both trade and merchandise interactions. And the GATT is part of its control too. This is the best protection on fair trade if the regulators can act properly according to the legislative and apply its duty with free will.
The worst scenario is the creation of such gatekeeper by another power broker through the community of commerce that no one would have a specific control over it and each sovereignty nations cannot get its collective bargain from it gatekeeper. Then, gatekeeper turns jailor.
I think Lee A Licata wrote: “I believe a freer economy, with fewer rules, but with rules that make some sense, (like if you buy the commodity, you have to take possession of it, and if you short the commodity, you have to have possession first) is the way to go....”
May the Buddha bless you?
Zsolt 10:37 17 Jan 12
It is a very interesting article but I am not sure it takes the present world system into consideration completely.
We all agree that today we live in a global world.
Global means that we are interconnected at multiple levels, not only economically but also politically, culturally, in sports, education, and through the Internet this interconnected nature extended into the virtual realm as well. We cannot even drink our morning coffee without being connected to multiple countries, and thousands of people contributing in order to take a single sip. Today we see hundreds of examples of our interconnected and interdependent network through economical, financial problems, environmental issues, how even a small change by one person or nation can have vast efcet on someone else even on the other side of the planet.
In short in such a global, integral system there are no policies, plans, actions that would not cause "spillovers". Whatever one individual or nation does, effects each part of the network. Some people call this the "butterfly effect".
Since the article mentions education as "non-spillover" policy, what can we say about racism, hate, discrmination for example, raising children in one country to hate people in other countries based on culture, genetics or religions? Or in the face of the mass immigration of the workforce in the global world harmonising professional education is essential to make sure the migrating work force is useful at every corner of the planet.
Most importantly it is a general, harmonized global education that can raise a new generation, or educate the present adult population on how to live, survive and prosper in this global human society which in essence behaves as a single organism whether we like it or not.
Today in the face of the global economical crisis we lose sight of that economics is just a single, although very important symptom of the true multi faceted global human crisis, which requires the building of completely new political and economical structures for example in order to build a peaceful, sustainable future for all of us.
And this process starts with a global education program which will give the foundations for all the other structures.
kirkomrik 01:10 14 Jan 12
Hey Dani,
Great article. Thank you.
I've postedon this as well
http://wp.me/p26aPU-aX
- kk